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How Will the Euro React Following the ECB Rate Decision?

How Will the Euro React Following the ECB Rate Decision?

2011-07-06 23:51:00
Jamie Saettele, CMT, Sr. Technical Strategist
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The EURUSD (USD Index) triangle continues to play out. Support is from the current level down to the triangle line, which is just below 14200 over the next few days (14160 today). All eyes will be on the ECB rate decision (1145 GMT). The ECB’s main refinancing rate is currently at 1.25% and it is widely expected that the Bank will increase the rate to 1.50%. Overnight index swaps are pricing in a 100% chance that they raise rates 25 pts and 50% chance that they raise rates 50 pts. The risk of a surprise is to the downside (if Trichet isn’t as hawkish as the market wants, etc.). To that point, 3 month yields are at just 1.14%. When the ECB was raising rates in 2006-2008, they were following the market rather than leading it (they also followed the market when cutting rates in 2008-2009). However, in April, they raised rates to 1.25% with the 3 month yield at just .79%. In any case, I think hawks are overzealous here. I mentioned yesterday that I am looking for a low in the EURUSD this week near 14300. Having traded to 14300 already I don’t want to be short but I would buy a spike below 14200 if given the chance. 14070 is the key level for bulls. Short term resistance is 14355/75.

Aussie unemployment is on the calendar tonight (1:30 GMT). Resistance is 10720/35. A short term head and shoulders top is visible on the hourly and suggests that the AUDUSD may break down into 10550/10600 before finding strong support. I’m looking for a low near there (like the EURUSD below 14200).

A doji formed yesterday in SPY (S&P ETF) and a doji formed today in the S&P future. This warns of at least a pullback from the recent intense rally. First support in the future is 1317.50.

The 30 year US Treasury Bond has reached resistance from the 6/14 low (former support) at 123 3/32. Additional resistance is 124 18/32 and 125 4/32. If bonds continue to tick higher, then the JPY and CHF will probably continue to strengthen. Currently, I am treating bond, CHF, and JPY strength as corrective.

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